Demand Uncertainty and Downward House Price Rigidity

Abstract

This study develops a price floor model to analyze how demand uncertainty affects pricing decisions. The model demonstrates that firms seeking to maximize profits, set quantity and a price floor prior to the resolution of uncertainty. Specifically, the model reveals downward price rigidity when faced with simultaneous slack demand and low construction costs, resulting in house price volatility that is lower than the volatility of actual demand. Downward house price rigidity carries significant macroeconomic and policy implications, affecting aggregate consumption, the effectiveness of monetary policy, and broader economic stability.